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Finance

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Apr 3, 2024

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1. Answer question 1, 2, and 8. (pp. 51-52). 1. List and describe the four major financial statements. 2. On which of the four major financial statements (balance sheet, income statement, statement of cash flows, or statement of retained earnings) would you find the following items? a. Earnings before taxes. b. Net plant and equipment. c. Increase in fixed assets. d. Gross profits. e. Balance of retained earnings, December 31, 2024. f. Common stock and paid-in surplus. g. Net cash flow from investing activities. h. Accrued wages and taxes. i. Increase in inventory. 8. From a firm manager's or investor's point of view, which is more important - the book value of a firm or the market value of the firm? Answer 1: 1) Four Major Financial Statements. We need to list and describe the four major financial statements. The four major financial statements are as follows. i) Income Statement ii) Balance Sheet iii) Statement of Cash Flows iv) Statement of Retained Earnings

i) Income Statement Income Statement is also known as the Profit and loss statement. This Statement summarizes the company's earnings and expenses over a period to find the Net income which is a bottom line of the company. ii) Balance Sheet: This balance sheet is another name for the statement of financial status that is being discussed here. Usually prepared at the close of the financial year under consideration, it summarizes the company's financial health as of a certain date. Included in this report are the company's resources, obligations, ownership interests, liabilities, and shareholder equity (Bragg, 2019). iii) Statement of Cash Flows This report tells you how much money the business makes and spends. It keeps track of how much cash comes into and goes out of the business within a certain time frame (Bragg, 2019). It's helpful to know if the business has enough cash on hand to cover daily costs and buy the assets. It tells you if cash went up or down by a net amount during that time. It displays a lot of cash entering and leaving a firm for collecting money, buying products, paying people, etc. Its investing cash flows illustrate how much money comes in and goes out. The company spends on investments, fixed assets, and more. Cash flows from financing operations represent all the money a business receives and spends (borrowing, selling, buying, paying interest, bonuses, etc.) iv) Statement of Retained Earnings It is also referred to as the Statement of Changes in Equity in some organizations. It illustrates the changes that have occurred in the equity of shareholders over a particular time period (Mendiondo, 2024). It details the changes in the owner’s investment from beginning to the end of an accounting period. The changes will be because of the issue of fresh capital, repurchase of capital, net income, dividends issued or any other adjustments. References: Mendiondo, J. (2024, January 27). Financial Statements: Essential Guide to Analysis and Interpretation . Finally. https://finally.com/blog/accounting/financial-statements/ Bragg, S. (2019, January 23). AccountingTools . AccountingTools. https://www.accountingtools.com/articles/the-four-basic-financial-statements.html

Answer 2: a) Earnings before taxes Income Statement b) Net plant and equipment Balance Sheet c) Increase in fixed assets Statement of Cash Flows d) Gross profits Income Statement e) Balance of retained earnings, December 31, 2024 Statement of Retained Earnings f) Common stock and paid-in-surplus Balance Sheet g) Net cash flow from investing activities Statement of Cash Flows h) Accrued wages and taxes Balance Sheet i) Increase in inventory Statement of Cash Flows a) Earnings prior to taxes are disclosed in the income statement. It consists of the company's net income following the deduction of depreciation and interest, but prior to tax reduction. b) Net plant and equipment are part of a non-current asset (fixed assets) on the balance sheet. c) Increase in fixed assets is identified as an investment in fixed assets on the Statement of Cash Flows under Investing activities. d)Gross profits are disclosed on the income statement. It is the total money reduced when it sells goods for less than they cost. e) Balance of retained earnings, December 31, 2024: Found in Statement of Retained Earnings. This shows the closing balance obtained through reconciliation with the beginning balance and the changes during the year. f) Common stock and paid-in-surplus: Identified in the Shareholder's Equity section of the balance sheet g) Net cash flow from investing activities is part of the cash flow statement. h) Accrued taxes and wages: Taxes accrued wages and taxes are expenditures that have been incurred but not yet paid, they constitute a liability for the organization. i) Increase in inventory: As detailed in the operating activities section of the Balance Sheet, it is part of the section titled “Changes in working capital” on the Cash Flow Statement generated using the Indirect Method.

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Answer 8: A company's net assets determine its value. The value of a business that is found by using its book values is called its book value. The market value of a company is found by looking at how much its net assets are worth. Book values will be noted at the price from the past. Market value, which considers several variables including investor sentiment, growth prospects, industry trends, etc., represents how the market currently perceives the value of the company. Therefore, the market value and book value are not the same. Therefore, Managers and investors concentrate on market value. Answer 2-1: We have the Balance Sheet items of Goodman's Bees Corporation Let us list them in a Balance Sheet form. Goodman's Bees Corporation Balance Sheet Extracts Assets Current Assets Cash and marketable securities 400,000 Accounts receivable 1,200,000 Inventory 2,100,000 Total Current Assets 3,700,000 Liabilities

Current Liabilities Accrued wages and taxes 500,000 Accounts payable 800,000 Notes Payable 600,000 Total Current Liabilities 1,900,000 Current assets are the assets which will be realized within one year from the end of the financial period. Cash and marketable securities are liquid cash and cash equivalents. Accounts receivable usually will be received within the credit period. Inventory will be regularly used by the company and replaced. All these items are Current Assets Liabilities that must be paid off within a year of the financial period's conclusion are referred to as current liabilities. Generally, unpaid salaries and taxes are settled within a year after the due date. Accounts payable usually will be paid within the credit period. Notes payable is assumed that will be paid within one year. All these items are Current Liabilities Net Working Capital = Current Assets - Current Liabilities = 3,700,000 - 1,900,000 = $1,800,000 Goldman Bee's Net Working Capital is $1,800,000 Answer 2 We have the Income Statement items of Fitness Studio, Inc Let us list them in the Income Statement form. Earnings before tax = EBIT - Interest expense Net Income = Earnings before tax - Taxes The firm has 100,000 shares of outstanding common stock and it is no preferred stock.

Fitness Studio, Inc Income Statement EBIT 773,500 Interest expense 100,000 Earnings before tax 673,500 Taxes 234,500 Net Income 439,000 Earnings per share = Net Income / Number of Shares Outstanding = 439,000 / 100,000 = $4.39 The Earnings per share of Fitness Studio, Inc is $4.39

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